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Telecommunications industry

LECs Challenge FCC's Price Cap Regulations

Strategic Insights

— 2 min read

A group of local exchange carriers (LECs) led by Bell Atlantic Telephone Co. has filed a lawsuit against the FCC, claiming that the agency improperly adopted new price cap regulations. The LECs argue that the FCC failed to follow the proper procedures when implementing the new productivity factors, using only economic earnings data that supported the agency's preconceived view. However, FCC attorneys argue that the agency was receptive to the data presented by the LECs prior to the implementation of the new price cap rules.

The dispute centers around the FCC's decision to set "interim" price cap rules governing local exchange carriers (LECs). The FCC "gerrymandered" the available data on LEC earnings to support its own conclusion that interstate access rates should be reduced, the LECs claim. The agency also erred by making its actions apply retroactively, they added.

The LECs, represented by attorneys Mark L. Evans and Paul T. Cappuccio, argued that the FCC failed to explain its actions when setting the original productivity factors and requiring LECs to "add back" the effect of previous years' earnings "sharing" obligations. They also claimed that the add-back rule effectively penalizes LECs twice for earning above the sharing threshold.

FCC attorney John Ingle countered that the agency had used its authority properly to establish rate-setting mechanisms. He argued that the rule changes applied only to LEC price cap calculations for this year onward and that the agency had sought further comment and data before establishing permanent figures.

Key Takeaways:

  • The LECs claim that the FCC improperly adopted new price cap regulations, using only economic earnings data that supported the agency's preconceived view.
  • The FCC "gerrymandered" the available data on LEC earnings to support its own conclusion that interstate access rates should be reduced, and made its actions apply retroactively.
  • The add-back rule requires that LECs reverse the effect of earnings sharing when calculating earnings for the second year, effectively penalizing LECs twice for earning above the sharing threshold.
  • The LECs argue that the FCC failed to explain its actions when setting the original productivity factors and requiring LECs to "add back" the effect of previous years' earnings "sharing" obligations.
  • The FCC argues that it has the authority to establish rate-setting mechanisms and that the rule changes applied only to LEC price cap calculations for this year onward.

Statistics:

  • $400 million: The estimated reduction in access charges for LECs due to the FCC's decision to implement a one-time "reinitialization" of price caps.
  • 3.3% and 4.3%: The original productivity factors set by the FCC in 1990.
  • 4.0% to 5.3%: The new productivity factors established by the FCC on an "interim" basis.
  • 1991-1992: The years during which the LECs earned above the sharing threshold, resulting in earnings sharing obligations.

Sources:

  • Bell Atlantic Telephone Co. et al. v. FCC, consolidated cases beginning at no. 95-1217.
  • FCC Order, docket 94-1 LEC price cap performance review proceeding.
  • FCC Order, docket 93-179.
  • TR ( Telecom Report), April 3, 1995.
  • TR (Telecom Report), October 2, 1995.

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